“The Bond Market Singularity”

In technological singularity is the hypothesis that the invention of artificial super intelligence will abruptly trigger runaway technological growth, resulting in unfathomable changes to human civilization. A similar concept may apply to financial markets in the realm that is bond yields versus equity prices producing a runaway event in its own right perhaps.

Correlation does not imply causation but as you know I’ve been floating my theory of everything a bit lately (see: 2018 Market Outlook) and it relates to the relationship between yields and stock prices. Not just as a casual relationship, but as THE relationship to watch. My basic premise is that low yields have been the primary function with which the US, and the world for that matter, has been keeping itself on an artificial growth path as one bubble after another has burst. Unprecedented debt has been the result and low yields keep masking and delaying the eventual reckoning (see also The Debt Beneath).

You may have seen this chart from my writings:

The primary premise: If this relationship is meaningful there’s a singularity where rising yields will hurt stocks as the cost of carry of the debt will grind everything to a halt.

This hasn’t happened yet obviously and frankly I can’t predict when it will happen. But I can observe.

Yesterday the 10 year pushed above 2.5% for the first time in a long time. And with historic overbought readings in equities it may be a folly exercise to prescribe any rejection in equities with rising yields this early, but bear with me.

Yesterday a couple of odd things happened. Firstly as I outlined internals were negative all day:

How unusual was this in context of new highs and a rising $VIX? This unusual:

Since the beginning of the year we’ve had virtually zero selling and cumulative internals always ended the day in the positive.

Except yesterday when the 10 year jumped above 2.5%. Negative internals prevailed all day long:

Let’s zoom in on my 10 year trend chart:

If this trend line is the relevant one we just did something we haven’t done since 2007: Bust above the trend line.

In 2007 such a burst above the trend line was the beginning of the end for stocks. Indeed going back to the late 80’s every single tag of the trend line has resulted in a dropping of the 10 year yield. And many times this was the direct result of Fed intervention producing stock market rallies or the Fed reacting to corrective activity in markets.

The 2000 top came near a trend line tag. The 1990/1991 recession required a dropping of yields following a trend line tag. The 1998 correction caused Greenspan to drop rates following a rise in yields. We know what happened after the 2007 peak: Zero bound by the Fed. The corrections in 2011 and 2012 were met with a drop in yields, the 2015/2016 corrections were followed by a record low 10 year. You see the trend.

2017 saw a tag of the trend line and then a renewed rejection. The pattern is eerily similar to 2006 and 2007.

Are we repeating this pattern here? Or are yields about to break out? I can’t say, but if central banks wish for inflation I say be careful what you wish for.

Were yesterday’s negative internals (strength in banks notwithstanding) already an indication that the larger stock market is already sensitive to higher rates?

He also is watching yields in relation to trend lines and his are different to mine which is fine:

Ultimately the market will let us know which trend line is relevant here.

But the main message is the same: Yields are rising:

And like us Gundlach is highlighting the complete lack of corrective activity, the one way action in equity prices and unprecedented volatility compression:

Overnight we see flushing in markets for the first time in 2018 as yields rose even further:

Guess markets didn’t like that.

Is 2.5% the singularity?

If the 10 year drops back below 2.5% and stocks rally I think we have our answer.

If it extends above 2.6% and stocks continue to drop I think we also may have our answer. In which case the answer is 2.5% not 2.63%.

If stocks rally and the 10 year keeps moving higher then 2.63% is the next level to watch.

For now the 30 year track record is yields dropping following a tag of the trend line, or fake out above. An extended journey above markets have never had to contend with. A journey into the undiscovered country until the singularity is achieved.